Growth Funds Definition & Investment Strategies

What is a Growth Fund?

Growth funds consist of stocks which pay little or no dividend but provide an above average annual return to investors.  These stocks within the funds are considered growth stocks because the money made annually is directly reinvested into research and development for new products and services.  A common feature of growth stocks is a high price to earnings ratio, as the stocks value are largely based on expected earnings.

Who Invests in Growth Funds

Growth funds are for investors who have a higher risk tolerance but also are willing to have longer-term investment horizons.  Due to the volatility associated with growth funds, there is great room for gains, but also an equal risk of a downturn.  This is why investors in growth funds must be prepared to stay with an investment for five to ten years in order to reap the rewards. 

Growth Funds and Your Portfolio

Growth funds will outperform other fund types (value & balanced) when the markets are trending strongly.  This is because growth stocks with high p/e ratios will outperform the market as investors chase the market.  However, value funds which are more balanced in stocks that pay high dividends will do better when the market experiences a sharp downturn.  For example, some growth funds were down over 50%, while value funds were able to keep the losses under 20%.  This is why it is key for an investor to have the proper asset mix for their portfolio.  As an investor comes closer to their retirement target, it is best to reduce the amount of their portfolio exposed to stocks and growth funds.